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Business: Crown Holdings is a worldwide leader in the design, manufacture and sale of packaging products for consumer goods and industrial products. They operate in three segments: Beverage, which accounts for roughly 70% of earnings before interest, taxes, depreciation, and amortization; Transit Packaging and Food, both of which collectively make up the other approximately 30% of EBITDA. Their consumer packaging solutions primarily support the beverage and food industries through the sale of aluminum and steel cans. Their packaging for industrial products includes steel and plastic consumables and equipment, paper-based protective packaging, and plastic film consumables and equipment, which are sold into the metals, food and beverage, construction, agricultural, corrugated and general industries.
Stock Market Value: $8.8B ($73.75 per share)
Percentage Ownership: 8.5%
Average Cost: $79.80
Activist Commentary: Carl Icahn is the grandfather of shareholder activism and a true pioneer of the strategy. While he is not slowing down at all, he has reached an agreement with his son, Brett Icahn, to rejoin the firm as the eventual successor. Brett plans to employ his father’s favored approach of pushing companies to make changes designed to boost their stock prices, though he hasn’t ruled out friendly bets too. This is not a departure from the strategy Carl has succeeded with for many years. He can be friendly (i.e., Apple, Netflix) or he can be confrontational (i.e., Forest Labs, Biogen), often it depends on the response of management. Brett is an impressive activist investor in his own right, not because he is Carl’s son, but because he has demonstrated a long track record of extremely successful activist investing. The Sargon Portfolio he co-headed at Icahn at one time totaled around $7 billion and included extremely profitable investments in companies such as Netflix Inc. and Apple Inc. The Sargon Portfolio significantly outperformed the market with an annualized return of 27%. However, prior to that Brett started in 2002 with Icahn as an analyst and was later responsible for campaigns like Hain Celestial (280.3% return versus 46.7% for the S&P500), Take-Two Interactive (81.5% versus 64.5% for the S&P500) and Mentor Graphics (106.4% versus 79.4% for the S&P500).
Crown operates in a consolidated global market that only has four scaled players globally and high barriers to entry – regional monopolies due to shipping costs, long-term contracts and training and experience to operate plants. They have an accelerating growth profile, which is catalyzed by sustainability trends and changing consumer preference: About 75% of new products go into cans today versus approximately 30% in 2014. They also enjoy the downside protection of a non-cyclical product.
Crown grew EBITDA during the pandemic, when demand for aluminum cans spiked since restaurants and bars were forced to close and consumers were buying canned cocktails and beer to consume at home. The company has underperformed its peers, including its main competitor Ball. Last week, they saw a steep drop in the stock price from $85.01 on Oct. 24 to $70.69 on Oct. 25, following their most recent earnings release. They attributed their lowered financial outlook to inflation, high interest rates and unfavorable currency translation. This underperformance is also due to shuddered demand for canned beverages that exploded during the pandemic, leading to an overage of inventory.
The opportunity to create shareholder value here is relatively simple: sell non-core businesses, buy back shares and focus on the pure-play beverage business. The company announced its acquisition of Signode, a transit packaging business, for $3.9 billion in 2017, and might be reluctant to sell it for less than that now. However, there is a lot of value to selling that business, the least of which is the amount of proceeds they receive (within reason). There is more value in how they use those proceeds (i.e., buying back stock in an undervalued, growing business). There is also tremendous value in freeing up management to focus on the core business, and there is value to being a pure play business and getting a market multiple closer to their pure-play peer, Ball. So, management should not be as focused on what they can get for Signode as in what a sale allows them to do in the future. Crown also runs an aerosol and food-packaging business that manufactures cans for household products and snacks and still owns a minority stake in the European food-can business. Icahn believes that the company should sell all these non-core assets and focus on the beverage can business which has secular tailwinds and is undervalued relative to its pure-play peer. Using cash flow to strengthen the balance sheet and repurchase stock ahead of this would enhance shareholder returns as Crown closes this valuation gap.
Icahn is not the only activist with a position in Crown. Impactive Capital first disclosed a stake in Crown in their first quarter 2020 13F filing and has advocated for the company to pursue the same opportunities that Icahn is advocating for – divesting non-core assets and share buybacks. Shortly after Impactive took its position, Crown announced a strategic review of its portfolio and capital allocation priorities. This resulted in the 80% divestiture of the company’s European food can business in 2021. But there is clearly more portfolio simplification that can be done here. Impactive always has an environmental, social and governance thesis in their investments and looks for situations where positive ESG improvements can drive value. This situation is no exception. Focusing on the growing aluminum can market as a replacement for plastic and glass is not only good for Crown but good for the environment. Because aluminum’s inherent properties don’t change through use or recycling, cans are 100% recyclable repeatedly.
It is important to note that there is a ton of value here, regardless of who is on the management team. I would not assume that Icahn or Impactive want to see a change in management here. But if management is not up to the task, that is always a possibility. On a recent conference call, Crown CEO Timothy Donahue said: “You never like to say, we’re caught off guard, but I think we were really.” When you are a CEO who has been caught off guard, the last thing you want to see is Carl Icahn show up in your stock.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and he is the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments. Squire is also the creator of the AESG™ investment category, an activist investment style focused on improving ESG practices of portfolio companies.